UK stock market: New rules could lead to bounce back
London is reeling in the wake of Brexit. In January, Amsterdam overtook London in becoming Europe’s largest share-trading centre, and already, roughly half of London’s trading volumes have moved to the continent, raising concerns about the future of the UK stock market.
Additionally, out of the 3,787 initial public offerings (IPOs) that were made on the world’s major stock markets from 2015 to 2020, only 4.5% were from the UK. Given that the UK holds 10% of the fintech market, this trend is worrying for many. As a result, new rules are being proposed for the UK stock market in the hopes of turning things around.
The UK’s plan to stay on top as a fintech leader
A 108-page report, commissioned by chancellor Rishi Sunak, recommends a £1 billion fintech growth fund, a fast-track visa process, and various changes to stock market listing rules.
The report, which former WorldPay chief Ron Kalifa prepared, warns that the UK’s position as a fintech leader is being threatened on many levels. Some of the threats cited include growing competition from overseas markets and the uncertainties of a post-Brexit world. In particular, the ability to hire top talent from Europe is trickier than ever, reducing the UK’s ability to compete effectively with other countries.
Indeed, especially since Brexit became a reality, the UK has seen many of its top fintech companies lured away to greener pastures, including Paris, New York City and Frankfurt.
One of the recommendations in the report calls for setting up a “visa stream” system that would streamline and fast-track the process, making it easier for people from around the world to come to the UK to work. It is believed that making obtaining a visa simpler will help the UK attract more global talent, which could help it retain its position as a fintech leader.
Another idea that is floated within the report is establishing a £1billion fintech growth fund. The fund would be designed for startups that need access to capital right away, and it could help attract more fintech firms to the UK.
The bulk of the report, however, revolves around proposed changes to stock market listing rules. These proposed changes have proven to be quite controversial, and many top asset managers and others in the financial services industry are coming forward and expressing concerns.
For example, the report recommends the introduction of dual-class share structures. Dual-class share structures involve listing shares with different voting rights, and they are already popular in the United States. Under this setup, some shareholders end up with no voting rights, and this is primarily why they are not allowed in the London Stock Exchange. Opponents of the idea vigorously defend the concept of “one share, one vote,” and they appear willing to fight to the bitter end to keep dual-class share structures from becoming a reality in the UK.
Although dual-class share structures generate controversy, the report recommends them because they give founders more control of their business following an IPO. It is believed that by making them available, dual-class share structures will attract more startups – especially fintech startups – to the UK. It could also help existing companies compete more effectively in the global market.
Another idea that is mentioned in the report is reducing the number of shares to 10% after an IPO is made available. Under the “free-float rule”, companies must list at least 25% of their shares after making an IPO.
Opponents of the 25% requirement state that it dilutes a company’s overall control, making it harder for founders to follow their visions. They also believe that such a high requirement causes many firms to miss out on post-IPO price gains. Not surprisingly, many asset managers are expressing concern about dropping the required number of shares to just 10%, and it is unclear whether this idea will come to fruition.
The report also recommends setting up a “scale box” to help fintech firms grow. Qualified fintech firms would have access to tools and support that make it easier for them to expand and compete in the global market. Currently, the UK fintech industry employs nearly 100,000 people. By making it easier for startups to grow faster, it is hoped that employment levels will skyrocket, helping the UK not only to retain its position in the fintech world but to expand it even further.
Will the new rules work?
The report is generating a lot of controversies, but it has proponents too. In particular, the London Stock Exchange Group Plc is pushing the UK government to ease the path for startups. It has given its stamp of approval to the report’s significant recommendations. At the same time, the Investment Association, a UK industry group for asset managers, has expressed concerns about the potential dilution of stock market rules.
According to London-based online trader Alex Williams of Hosting Data, the UK already has some of the most relaxed regulations when it comes to trading online in the stock market, thanks to the independently administered regulatory body, the Financial Conduct Authority (FCA).
As Williams points out: “They are admired for being reasonably-lenient and allowing a diverse possibility of trading. Some countries have stricter regulations, as they fear money laundering. Because of this lenience, there is healthy competition and a stable industry. The FCA also protects you against any fraud on the part of the brokerage firm. They can hand out – and do hand out – fines in the hundreds of millions.”
Opponents of the report’s recommendations have suggested instead that a new category should be established for fintech companies.
Until the new budget is approved, there’s no telling which – if any – of the recommendations in the recent report will be enacted. The debate about these recommendations continues to rage, and there are good arguments on both sides of the issue. Regardless of which side of the issue anyone is on, one thing is clear: the United Kingdom is losing its grip on its position as a global fintech leader.
Since the last financial crisis, the number of IPOs from UK firms has more than halved. As the country adjusts to the post-Brexit reality, it’s more important than ever for it to take proactive steps to protect its position on global markets. More than likely, some of the recommendations in the report will be enacted, and others won’t. Ultimately, the new budget could decide the fate of the country’s financial future for many years to come.
The editorial unit